Between the report and the investor

By Magdalena Mikołajek-Gocejna, Economics and Business Administration Journal

The traditional model of reporting, based above all on historic data concentrating on profits and the asset and financial situation of companies, does not suffice anymore in the present circumstances.

Furthermore, investors expect thorough information as to the strategy and development perspectives of the company. However, there seems to be a clear lack of information directed at the future of enterprises. Financial reporting does not meet the requirements of investors, as a result of which communication gaps appear; they include, among others:

Information gap: it appears in situations where investors receive no information as to a carrier of values which is important from their point of view or when the information provided is unsatisfactory and too general compared to market expectations. According to analysts, the biggest information gap relates to market development, revenues on new products, competitive environment, market share, intellectual capital and customer retention rate. On the other hand, according to investors, the biggest information gaps include the factors relating to the success of new products, market development, staff and customer retention, new product creation cycles, competitive environment, intellectual capital, brand capital and strategic action directions.

Reporting gap: it occurs when the company management considers a given factor to be a significant value generator but decides not to publish information in this respect.

Quality gap: it appears in a situation where the company management considers a given factor to be a significant value carrier but this is not reflected in the internal reporting system. As a rule, the biggest gap in this respect relates to the quality of the management staff, the size and development rate of the market and views on competition.

Gap of understanding: it appears in the case of discrepancies between the company management and information users in the assessment of significance with regard to various factors.

Perception gap: it refers to the difference between the activity level of company managers with regard to reporting measurement factors and the level of relevance of the information received by the investors. The occurrence of a communication gap influences discrepancies between information presented in financial statements and the valuation of company stock by the capital market and leads to a gap in the value assessment. This, in turn, may have an adverse impact on value generation for the company owners and the whole value management system (Value Based Management). Therefore it is of utmost importance to shape the information policy of a company in such a way that:

  • the investing community understands the essence of the development strategy of the company and the ultimate objective of business activity, which is to maximise value for stockholders;
  • the investors understand the general characteristic of processes and systems supporting the value generation process;
  • the investors were informed of the current basis of progress in the execution of the adopted assumptions as well as of all amendments introduced thereto;
  • the investors have access to information on all significant events related to the company, with regard to which ignoring or distorting could influence investment decisions.

Naturally, the elimination of gaps requires above all their identification, considering the main reasons for their occurrence and undertaking relevant actions to remedy them. One way to improve communication with investors is certainly to get to know better their information requirements and to expand the package of information provided to them.

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